We have shown previously that myelin-forming oligodendrocytes express the protein tyrosine phosphatase SHP-1 and that myelin formation was decreased in SHP-1-deficient motheaten mice compared to that in normal littermates. These studies suggested a potential importance for SHP-1 in oligodendrocyte and myelin development. To address further this possibility, we analyzed myelin formation by microscopy and myelin basic protein (MBP) gene expression in motheaten mice at ages when myelination occurs in the developing central nervous system (CNS). Furthermore, we correlate these findings with MBP gene expression in oligodendrocytes grown in vitro. We have found that CNS myelination was significantly reduced in SHP-1-deficient mice relative to their normal littermates at multiple times during the active period of myelination. Under electron microscopy, greater numbers of axons in spinal cords of motheaten mice were either unmyelinated or had thinner myelin sheathes compared to those in matched areas of normal littermates. Accordingly, MBP protein and mRNA levels were reduced in SHP-1-deficient mice compared to that in the CNS of normal littermates. In vitro, O1(+) oligodendrocytes from motheaten mice expressed much less MBP than O1(+) oligodendrocytes of normal littermates indicating an alteration in oligodendrocyte differentiation. The latter correlated with reduced MBP mRNA relative to cerebroside galactosyl transferase (CGT) gene mRNA in SHP-1-deficient oligodendrocytes in purified cultures. We propose that SHP-1 is a critical regulator of developmental signals leading to terminal differentiation and myelin sheath formation by oligodendrocytes.